Archive for February, 2010

Here is an interesting clip from MLive about the debate over Flint’s dire finances.   Michigan has a receivership program that has been used a number of times so municipalities cannot just file bankruptcy in federal court without going through the state.  The article poses the sensible, if painful and difficult, questions of concessions on salaries and benefits compared with outright layoffs (in a city with 25% private sector unemployment) as well as collaboration with other municipalities on providing services (we applaud that approach).   We also note the exaggeration of county Commissioner Curtis, who said “cities across the country are going into Chapter 9 and getting relief from the contracts…”  Of the 89,000 municipalities in the U.S. there’s Vallejo, California and Prichard, Alabama.  Las Vegas monorail mentioned in the Wall Street Journal article last week  (you may need a subscription to access this) is in Chapter 11 which is the part of the bankruptcy code for corporate filings.  There have been a number of Chapter 9 filings by hospital districts, as well as numerous, small land-development-based special districts.  Then there’s Connector 2000 in South Carolina.  Harrisburg, PA has been discussed and of course, Jefferson County, Alabama sewer system,  but there has been more chatter on the wires since the Journal.  Connector 2000, the Harrisburg incinerator and the monorail have each been problem credits for some time, apart from the recession and credit market meltdown.

Looks like the city is making its best effort to try to resolve budget imbalance.  Ohio is one of the states that has a strong oversight/receivership program and municipalities may not file bankruptcy without approval of the state.  Local governments there do rely on income taxes, which is tough in the current economy, especially in auto and manufacturing which dominates the landscape.

Here’s a clip from the California League of Cities concerning AB 155.  AB155 (and its parallel, SB88) briefly, would prevent California cities from filing bankruptcy without going through the state — California Debt Investment Advisory Commission (CDIAC).  Numerous other states have adopted similar provisions, which puts the state in the middle of helping with a workout and prevents a municipality from directly filing for bankruptcy with the federal courts (the government level where bankruptcy is handled).  The bill has been around but appears to be picking up momentum.  The League opposes this bill.

Here’s a good, local clip about the Harrisburg bond/incinerator problem:

Harrisburg, Pennsylvania can’t really afford to pay for the Resource Recovery bonds that it guaranteed.  Their recently adopted 2010 budget does not include debt service for this guarantee (see prior post with link).  It is accepted practice for rating agencies to rate municipally (or state) guaranteed debt off the credit of the guarantor.  Unlike bond insurance or any insurance for that matter there are no capital set-asides for guarantees by municipal governments.  Market analysts assume that the city or county would raise its taxes to the point of covering the debt.  Harrisburg is now testing that assumption. 

There has been some disagreement on the underwriting floors (at least in bond insurance, if not at the rating agencies) whether one should take into account the credit quality of the project being financed or simply “look through” to the guarantor’s quality.  I suggest a middle ground.  Assume that the Resource Recovery project was rated on its own merits as a project finance — what category would that be?  Then assume a contingent liability on the balance sheet of the guarantor of that lower credit quality.  If it is clear that the guarantor cannot afford the contingency the rating should embed this risk.  This thinking extends to “moral obligation” bonds whose ratings are automatically notched down from the state (or infrequently, local) rating.  Should a “white elephant” project backed by a moral obligation bear the same rating as one that is performing and essential?  (We don’t think so)   Affordability of obligations (add pensions, opeb, debt service to the list) is going to become an increasingly important risk factor as government wrestles with raising taxes, reducing expenditures and satisfying multiple constituencies — unions, taxpayers, retirees and service beneficiaries.

This link from a recent release by the Brookings Institution, Robert Puentes comments on the New Jersey and Virgina transportation funds.  New Jersey’ transportation trust fund will be spending all of its revenues on debt service by 2011; Virginia’s new governor too, suffers lack of funds for infrastructure improvements.  Concerning gas tax as a mechanism for raising funds, New Jersey and Virginia are among the lowest in the nation.  Granted, New Jersey heavily tolls its turnpike drivers.  The website, GasBuddy shows a map by county of prices around the country — updated every 15 minutes.  New Jersey is clearly on the low end, Virginia a bit higher but not nearly as high as New York or California….

See attached item from Reuters:

Click on article title to get the link (sorry for the clunkiness)  Hat tip to Mayraj Fahim.

Several states are showing scary illiquidity.  New Jersey’s governor just yesterday impounded funds the legislature had already appropriated and announced a state of emergency.  He stopped short of “declaring” emergency, which would have given him special powers over contracts.  New Jersey comes up high on the list of states with big budget gaps, heavy pension obligations and loudly falling revenues.  New Jersey spending has grown dramatically over the last 25 years.  While there was one state employee for every 86 people in 1982 in the state, today there is one employee for every 60 people.  In the 2000-2008 time period, spending grew 28% on a constant dollar basis.  Debt as a percent of gross state product (adjusted for real 1982 dollars; bear with me) was 11.1 percent in 2008 — among the top ten states, but no where near the US figure of around 60%.  This is not to mention any unfunded pension liabilities plus $1.2 billion borrowing from the US Treasury to make unemployment insurance payments.

Illinois is in the same deep water.  One month ago the state had $5.1 billion in unpaid bills and is delaying payments to vendors by than 90 days.  Crain’s Chicago Business shows columnist Greg Hinz saying its unclear when full insolvency takes place — it just gets slower and slower until business moves out and payroll isn’t met.  

Lets roll back the clock.  The Reagan administration in the early 1980’s proposed the “Program for an Economic Recovery” which devolved programs from the federal to the state and local level.  The action coincided with the end of the 1982-83 recession when the economy took of sharply leaving surplus in many states’ coffers.  For seven straight years state governments increased their budgets 8% each year or 3.2% in constant dollars.   The recession in the early 1990’s left the states poorly positioned to handle the downturn.  Like today, there were mid-year budget reductions, cuts in aid to local government and increases in taxes.  New Hampshire, Rhode Island, Massachusetts, California and Illinois saw ratings downgrades during that time.  Record tax increases led to voter unrest and new tax limitations.  In the mid-term elections, Bill Clinton lost the House of Representatives to a Republican majority.  Newt Gingrich and his party’s “Contract With America” promised 10 bills in 100 days — to further devolve social programs to the states.  Fast forward to the high tech boom in the late 1990’s and bust, then 9/11.  There was monetary easing and policies designed to advance homeownership and voila, here we are today.  I’ve linked two charts that show state spending increases in constant dollars sorted from high to low state expenditure table1992-2000 and state expenditure table2000-2008.  California, for example, held the line during the “Contract with America” years, but expanded 29% between 2000-2009.  Rhode Island also held the line during the first period but grew 30% from 2000-2008.  Illinois grew its budget in constant dollars in both periods — 22% from 1992-2000 and another 20% from 2000-2008.

Also attached is a power point of a talk I gave this week on these topics at the National Federation of Municipal Analysts advanced seminar in Florida.

A blogsite, “Mish’s Global Economic Trend Analysis” recently aggregated a selection of news stories covering state and local government budget deficits and proposed layoffs.  Click here  to link to the post.  There are a few differences between private sector layoff announcements and the public sector that are worth pointing out.   The private sector typically announces layoff actions that are already decided.  There is little incentive to inflate the numbers.  On the other hand, public sector layoff announcements are typically proposals, made in the context of budget negotiations and ultimately subject to the influence of many constituencies: unions, elected officials, civil servants, and service beneficiaries.  I don’t believe it’s common practice for the private sector to lists vacant job positions in their layoff numbers.  Governments typically count the position that has been budgeted for and maybe even funds were appropriated but the position was not filled.